FASB’s Take on Diversity

I was originally going to title this blog “FASB Opposes Diversity…In Business Reporting.” Yes, it is a little sensationalist, but isn’t that what we are supposed to do to get you to read these things? And isn’t opposing diversity in reporting one of the lynchpins of many FASB projects? In fact it often times seems to be the primary reason for an item being added to the EITF agenda. (For those of you thinking that is the EITF and not the FASB, I would note for you that in its current structure all EITF decisions must be approved by the full FASB Board before they are issued.) If you don’t believe me look at the recent spate of ASUs that have been issued through the EITF process. In almost every case one of the cited reasons for needing to address the issue in the first place is “diversity in practice” on how the underlying transactions were being reported from one business to another.

So why did I decide against naming the blog “FASB Opposed Diversity…?” Because I read a recent letter from Russ Golden, the FASB Chairman, which made it clear that FASB is willing to tolerate diversity – differences – in reporting, at least when it comes to differences in standards issued from the FASB and IASB. That letter made it clear that converging standards for convergence sake is not enough of a reason to change U.S. GAAP. Or in Russ Golden’s words “When standards proposed for convergence do not represent an improvement to U.S. GAAP, we have no choice but to do what we believe is in the best interests of investors who use it.”

Of course “improvement” is like beauty and is based on the eye of the beholder. In the FASB’s case, they focus on users of financial statements (investors) to determine if changes are an improvement. That is not to say they don’t listen to auditors and preparers, but users of financial statements are clearly “more equal” than other constituents to borrow a phrase from Animal Farm. And it appears that the FASB may have an attitude that U.S. GAAP is “more equal” than IFRS when it comes to accounting standards. If that is true, then the leasing and financial instrument standards may be the last “converged” (or maybe not so converged) standards we see for a long time.

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One Comment on “FASB’s Take on Diversity”

As they found out in organizational studies, an organization is only as diverse as its controlling members. Boards of Directors without diversity were found to be more likely to have fraud, mistatements, governance failures, and/or strategic misses than Boards with at least some diversity. The reason was simple as it was obvious: people who are alike are bound to think alike. The same can be applied to reporting standards. We have Boards of solid practitioners ingrained with decades of experience… in their home countries. As the IFRS Board found out the hard way, trying to force their Western European culture of principles over rules onto China and Japan was not as easy as they initially believed. Meanwhile, former British colonies accepted the standards with open arms.

I think Adam Smith’s Wealth of Nations somewhat applies here: “The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.”

Plato’s From the Republic also applies: “I need no longer hesitate to say that we must make our guardians philosophers. The necessary combination of qualities is extremely rare. Our test must be thorough, for the soul must be trained up by the pursuit of all kinds of knowledge to the capacity for the pursuit of the highest–higher than justice and wisdom–the idea of the good. The good is to the intellectual faculty what the sum is to that of vision; it is the source and cause of truth, which is the light whereby we perceive ideas; it is not truth, nor the ideas, but above them; their cause, as the sun is the source of light and the cause of growth. Again, the material things with which the eye is concerned are in two categories–the copies, reflections or shadows of things, and actual things. Correspondingly the things perceived by the intellect are in a secondary region–as the mathematical–where everything is derived from hypotheses which are assumed to be first principles; or in a supreme region, in which hypotheses are only the steps by which we ascend to the real ultimate first principles themselves. And it will follow further that the mind has four faculties appropriate to these four divisions, which we call respectively pure reason understanding, conviction and perception of shadows; the first pair being concerned with being, the field of the intellect; the second pair with becoming, the field of opinion.”

The Board definitely needs diversity in reporting and for sure it will happen one day. The question is how many years after the federal recognition of diversity of people it will take for it to reach the recognition of diversity of legal entities. Both of whom, under U.S. law, are recognized as ”persons.”